Start your engines: Why invest in start-ups?
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Australia has the world’s 13th strongest economy and ninth highest per capita income. In fact, economic growth looks to be picking up pace fueled by consumer spending and according to the ABC financed by shrinking household savings. The economy grew 3.4% in the last financial year, the fastest annual rate of growth since 2012.
Growing economies usually point to an increase in the number of start-ups coming to market. Conversely, young companies are generally good for the economy. Think about this: when Apple went public, 300 people became millionaires. Now think about the impact Apple has had on global economies.
Based on that fact alone, it’s no wonder that investors and venture capitalists want a piece of a decent start-up’s pie. Of course savvy investors know that 90% of start-ups are destined to fail.
Suffice to say, investing in start-ups can be a tricky business and you need to get on board ones that have global appeal.
So what should you look for when investing in a start-up?
First, let’s have a look at why they fail.
entrepreneur.com cite seven reasons for failure. These are:
- Lack of focus
- Lack of motivation, commitment and passion
- Too much pride, resulting in an unwillingness to see or listen
- Taking advice from the wrong people
- Lacking good mentorship
- Lack of general and domain-specific business knowledge: finance, operations, and marketing
- Raising too much money too soon
The same article, cites the reasons for success and what venture capitalists may be looking at when they sink their money into an unknown entity:
- Founders are driven by impact, resulting in passion and commitment
- Commitment to stay the course and stick with a chosen path
- Willingness to adjust, but not constantly adjusting
- Patience and persistence due to the timing mismatch of expectations and reality
- Willingness to observe, listen and learn
- Develop the right mentoring relationships
- Leadership with general and domain specific business knowledge
- Implementing “Lean Startup” principles: Raising just enough money in a funding round to hit the next set of key milestones
- Balance of technical and business knowledge, with necessary technical expertise in product development
According to Bill Gross CEO of Idealab, success is also based on timing.
In his Ted Talk he cites Z.com. This was an online entertainment company, with a great business model but minimal broadband penetration. The year was 1999 and online video content was in its infancy. The market wasn’t ready and the company folded in 2003. Two years later YouTube arrived and the rest of online content’s impact is history.
In Australia, the start-up scene has come of age recently. The AFR believes cyber start-ups are the next big thing... and that is particularly true in an era when even the Victorian Government is putting citizens’ private information at risk.
Also looking the goods are those in martech, augmented reality, payments processes, ag-tech, fintech and impact management software such as Socialsuite.
The start-up scene is big and getting bigger and each week, Finfeed.com will look at a fresh new start-up that could be solving the next big problem.
Editor’s note: You may have noticed recently that each week we have been featuring a range of different topics. Well, each week you can find new columns on finfeed.com in the tech, medical cannabis, biotech, green investing and small cap investing spaces.
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